IPO: What and Why?

In the last budget, the finance minister of India Nirmala Sitharaman announced that LIC, the oldest insurance company of India is going to be an IPO. What exactly does IPO mean and why it is beneficial to the nation’s economy is what we will be looking at in this write up.

What?

IPO or Initial Public Offering refers to the process by which a private company opens its shares to the public and then becomes a publicly- traded company. By issuing their stocks to the public, the company widens its reach and attracts even more investors.
An excellent example of a private company to IPO is Saudi ARAMCO, which has emerged to be one of the biggest companies globally, not to mention profitable, since it went public.

Why?

There are a number of advantages of IPO including –

• Better opportunity for the company to obtain capital which further helps the company to grow.
• It provides an exit opportunity to stake-holders and investors, a better chance to see potential returns or liquefy their current investment.
• The increased exposure to new investors and potential clientele and a rise in credibility.
• Reduced cost of capital as a private company has to pay more interest on loans etc. than an IPO. The increased credibility comes handy here too.
• An IPO can use publicly traded stock as a means of payment, which in turn makes sure that the employees receive proper compensation and thus have plenty of incentive to give their best towards the company’s interest.

That is not to say that IPOs have no disadvantages- every coin has two sides and they are no exception. These disadvantages include problems like the potential loss of control as public holds a considerable amount of power in an IPO to higher transaction costs as the company has to keep up on its toes with a number of technicalities that come with publicly traded stocks and having to hire a whole set of specific employees to overlook the workings of an IPO.

But when all is said is done, the fact that holds the most truth is that an IPO provides more and better opportunities to a corporation to grow and expand. The profit too doesn’t only go to the higher-ups but actually adds to the public sector, strengthening the economy as a whole.
On that note, the expectations are high when we think about one of the nation’s oldest and largest companies going public as it can provide a major boost to the Indian economy and so we wait with bated breaths.